ed by service payments on FDI. When FDI flows are sustained over a long period, foreigners inevitably came to own a substantial portion of the country's capital stock in the sectors that attracted FDI. This prospect is not viewed with as much concern as it once was FDI is not likely to be volatile: once invested, the real asset is not going to more, although changes in ownership are possible. Eventually, a foreign investor may want to sell to a local partner or divest onto a local stock market, and the host country needs to be prepared for a repatriation of capital. In times of stress, however, investor may well find ways to get their capital out quickly. Many investors set as a target the recouping of their outlays (which are usually less than total project cost) within two or three years, through repatriated) profits. В
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Composition of Net Private Capital Flows (in billions of 1985 US dollars)
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FPI potentially has a much wider range of effects, depending on the type of instrument and how it is used. It can occur through securities placed in foreign or domestic markets, including short-term funds and demand deposits. (The relation of these two instruments to physical investment may be limited; they may be much more a function of financial variables). Although many of its impacts can be similar to those of bank loans and FDI, portfolio investment can also have a much greater effect on domestic capital markets and interest rates. Whereas direct investment regimes, portfolio flows raise issues of financial and capital market regimes and their management. Portfolio investment touches more on issues of disclosure, accounting, and auditing that does direct investment.
When portfolio investment takes the form of an external placement (bond or equity) and the funds are used to finance new investment, the effects are in the real sector, as discussed for FDI. If the funds are used for other purposes, the result depends on those purposes. Paying down debt might ease pressure in the banking sector or build reserves. If the inflow is subsequently invested in domestic capital markets or deposited in banks, the money supply and domestic credit expand. Demand for assets, including real estate, would probably increase, with effects similar to those of foreign investment in local markets (discussed below). If the funds are used for consumption, pressure on domestic output could increase, leading to a rise in prices. These uses are likely to put more upward pressure on the exchange rate and downward pressure on interest rates, as the prices of nontradables and domestic assets are bid up. This is true whether the government or the private sector carries out the initial borrowing or stock issue. Offshore placement do not give rise to volatility concerns in the issuing country's market. Subsequent trad ing in the asset occurs in the foreign market and does not result in further capital...
